February 02, 2016
Margot Sanger-Katz had a NYT Upshot column arguing that Hillary Clinton and Bernie Sanders plans to have Medicare negotiate drug prices ultimately won’t prove successful in lowering costs because Medicare can’t simply refuse to pay for a drug. There is much truth to this argument, but it is worth working through the dynamics a step further.
The reason why Medicare has to accept prices from a single drug company, as opposed to choosing among competing producers, is that the government gives drug companies patent monopolies on drugs. Under the rules of these monopolies, a pharmaceutical company can have competitors fined or even imprisoned, if they produce a drug over which the company has patent rights.
The granting of patent monopolies is a way that the government has chosen to finance research and development in pharmaceuticals. (It also spends more than $30 billion a year financing biomedical research through the National Institutes of Health.) It could opt for other methods of financing research.
For example, Bernie Sanders proposed a prize fund to buy the rights to useful drug patents, following a model developed by Joe Stiglitz, the Nobel Prize winning economist. Under this proposal, pharmaceutical companies would be paid for their research, but the drug itself could then be sold in a free market like most other products.
In this situation, almost all drugs would be cheap. We wouldn’t have to debate whether it was worth paying $100,000 or $200,000 for a drug that could extend someone’s life by 2–3 years. The drugs would instead cost a few hundred dollars, making the decision a no-brainer.
There are other mechanisms for financing the research. We could simply have the government finance clinical trials, after buying up the rights for promising compounds. In this case also approved drugs could be sold at free market prices.
There are undoubtedly other schemes that can be devised that pay for research without giving drug companies monopolies over the distribution of the drug. Obviously we do have to pay for the research, but we don’t have to use the current patent system. It is like paying the firefighters when they show up at the burning house with our family inside. Of course we would pay them millions to save our family (if we had the money), but it is nutty to design a system that puts us in this situation.
Anyhow, if we are having a debate on drug prices, we shouldn’t just be talking about how to get lower prices under the current system. We should also be talking about changing the system.
Addendum:
For those who want more background on the Sanders Bill, here are a few pieces from James Love at Knowledge Ecology International, who worked with Sanders’ staff in drafting the bill.
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